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G7 annual output could rise by £107bn through reshoring

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U.S. President Joe Biden and British Prime Minister Boris Johnson gesture as they pose for a family photo with G-7 leaders; European Council President Charles Michel, Japan's Prime Minister Yoshihide Suga, Italy's Prime Minister Mario Draghi and French President Emmanuel Macron at the G-7 summit, in Carbis Bay, Cornwall, Britain June 11, 2021. Patrick Semansky/Pool via REUTERS     TPX IMAGES OF THE DAY
G7 countries include the UK, US, Canada, France, Italy, Japan and Germany. Photo: TPX IMAGES OF THE DAY

The G7 group of advanced economies could benefit from a $136bn (£107bn) annual boost to output through reshoring, new research has shown.

According to the latest edition of PwC’s Global Economy Watch, the move has the potential to increase output to as much as $272bn in constant 2019 prices over the next decade.

Reshoring is the process of returning the production and manufacturing of goods back to a company’s original country. The accounting firm analysed the economic potential for reshoring across three critical areas of the economy: pharmaceuticals, computers and electronics, and electrical equipment.

The data found that in total between 600,000 to 1.2 million jobs could return to the G7 over the next decade, with the largest increases in the US and Germany.

The UK could see between 60,000 to 120,000 jobs returning, depending on how gradual or rapid the reshoring process is.

The other four countries in the G7 include Canada, France, Italy and Japan.

During the global financial crisis of 2007-2008, world exports fell by 10% in one year as demand dried up. Although this recovered, the growth rate slowed considerably towards the end of the last decade.

PwC suggested that wage growth, new technologies, and trade tensions (between the US and China) disrupted global trade flows.

Before the coronavirus pandemic wreaked havoc on the global economy last year, several businesses were already considering reshoring some of their overseas operations.

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“As the global economy recovers from the disruptions caused to highly integrated supply chains during the COVID-19 shutdown, there is greater interest across advanced economies around reshoring jobs and building resilience in critical areas,” Barret Kupelian, senior economist at PwC, said.

“While this analysis is static and limited to three areas, it does highlight the potential for job creation over the next decade depending on the speed and scale of such policies.”

However, Kupelian drew attention to the fact that reshoring is not an entirely costless process. Countries with high employment rates, or those close to full employment, may see some net output losses, particularly if they are transferring workers from more productive sectors to less productive ones.

“As a result, policymakers should carefully consider and balance these potential negative economic effects against the security benefits of producing critical goods domestically,” he said.

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The PwC report also revealed the slack that exists in many G7 economies which will suppress demand-side inflationary pressures.

It comes as rising inflation has been a growing concern of late as economies recover from the pandemic.

The global supply chain disruption will also factor in, as prices in the short-term will fluctuate due to shortages of equipment and raw materials. This will affect certain sectors differently, with car manufacturing, for example, being hit by a shortage of semiconductors.

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